13 January 2021

China's new export controlregime may affect companiesworldwide

Marnix Somsen
Marlies Heemskerk- de Waard
+ 1 other experts
The Export Control Law (ECL) – in effect since 1 December 2020 – aims to provide a unified framework of export controls and to strengthen coordination between the different agencies involved in its enforcement. However, the law is unclear on a number of key questions as to its scope, applicability and enforcement mechanism. In particular, the ECL provides for extra-territorial application to re-exports of Chinese controlled items, but it remains to be seen to what extent the Chinese authorities will enforce such provisions in the foreseeable future. The new ECL also includes a number of broadly and ambiguously phrased provisions, allowing the Chinese authorities to take measures to safeguard China's national security and interests. It is not yet clear how these provisions may be applied and what implications they may have for foreign companies doing business in or with China. Given its extraterritorial effect, the ECL may affect companies doing business in and with China around the globe. We recommend that they monitor further developments and take measures to mitigate their exposure.

Background

Previously, China's export control measures were scattered over various laws and regulations, supported by different catalogues and lists of controlled products and technologies. In addition, the measures were enforced by different government agencies without much coordination between them. The ECL consolidates China's export controls framework and coordinates enforcement. The inclusion of various broadly phrased provisions promoting China's national security and interests was undoubtedly triggered, at least in part, by the rising tensions between China and the US over the past few years and by related US export controls targeting China.

Controlled items and restrictions imposed

The scope of the controlled items under the ECL resembles that of many other export control regimes, covering dual-use items (with both civilian and military applications) as well as military and nuclear items. Other items that are related to the maintenance of national security and interests or subject to international obligations, such as non-proliferation, may also be controlled. Certain data, such as technical documentation on controlled items, may itself qualify as controlled. Controlled items may include products, technology and services. While the ECL aims to implement a uniform export control regime by developing lists of controlled items, so far only one new controlled items list has been announced, covering commercial encryption. Besides that, existing lists or catalogues of controlled items still apply pending the introduction of new lists. Non-listed items may be designated by the competent authorities as “temporarily controlled items” for up to two years. In addition, exporters must apply for an export licence if they know or should know that the export of an unlisted item would be likely to:
  • endanger China’s national security or national interests;
  • be used in connection with weapons of mass destruction; or
  • be used for terrorism.
The restrictions imposed on controlled items under the ECL are similar to what is provided in other export control regimes. They include:
  • licensing requirements for the export of the vast majority of controlled items;
  • a prohibition on the export of certain items to specific destinations or parties; or
  • a total ban on the export of select controlled items, regardless of the destination or end user.
As the ECL does not detail the process for granting a licence, implementing measures are expected to provide more clarity.

"Deemed exports" and "re-export"

The ECL covers both the cross-border transfer of controlled items and "deemed exports", where a Chinese party releases controlled items to a foreign party within China. For example, the handing over of controlled physical goods in China to a foreigner could on its own trigger the application of ECL. A Chinese R&D employee who verbally shares controlled knowledge with a foreign visitor in China would also qualify as a deemed export. Furthermore, "re-export", which is not a defined term under the ECL, "shall be governed by the applicable provisions" of the ECL. This means the ECL covers re-exports, that is, the further export of Chinese controlled items to a third country. If a company exports a Chinese controlled item from China to country A and then exports it onward to country B – whether or not incorporated in a new product – the export of the Chinese controlled item or the product in which it is incorporated from country A to country B may also be subject to Chinese export controls. This would be similar to US in rem jurisdiction over the re-export of controlled US-origin items or foreign-made items incorporating a certain percentage of controlled US-origin content. However, the ECL does not set any threshold of controlled Chinese content above which the Chinese authorities may assert jurisdiction over the re-exported item where that content is incorporated. This means that the Chinese authorities may, in theory, assert extraterritorial jurisdiction over a broad range of transactions involving any Chinese controlled content. The ECL's general applicability to re-export shows China's desire to control this. But in the absence of further clarification about which ECL provisions apply and how (let alone potential enforcement guidelines), when and how the Chinese authorities will enforce control over the re-exports of Chinese controlled items remains to be seen.

End-use/end-user

The ECL requires exporters to submit end-use and end-user certifications to the competent authorities with regard to the export of controlled items. These certifications must be issued by the end-user or its government. The end-user must commit not to change the end-use or transfer the item to any third-party without authorisation from the Chinese authorities. Exporters and importers are further required to report to the Chinese authorities any potential changes in the end-use or end-user. Foreign parties violating end-use/end-user commitments may be designated as a controlled party that may be restricted or prohibited from engaging in transactions relating to controlled items.

Aspects of national security and interests

Apart from amplifying China's export controls framework, the ECL also includes various provisions aiming to promote China's national security and interests. First, as mentioned above, in addition to the listed dual-use items, in terms of military items and nuclear items that are subject to export control, the ECL gives the authorities grounds to broaden its application to unlisted items "for reasons of national security or public interest". Second, the ECL provides for the possibility to blacklist foreign importers or end-users of Chinese controlled items whose behaviour endangers China's national security or interests. An exporter is by default prohibited from exporting controlled items to any blacklisted party, save for a special permission by the authorities based on the exporter's application. The ECL goes even further by allowing foreign parties to be held accountable for harming Chinese national security or interests generally, without stipulating any clear, explicit link to controlled items. And finally, the ECL allows for the imposition of unspecified “reciprocal measures” if another country “abuses” export controls to endanger China’s national security or national interests. Based on the relevant provision, China may take countermeasures against trade restrictions imposed on Chinese companies by foreign authorities, in order to further advance China's foreign policy or industrial policy goals. Undoubtedly, these provisions are a response to the geopolitical tensions between China and the West, notably the US, and recent export controls measures aiming to thwart China's economic, technological and military ambitions. The scope of all of these provisions is rather general and ambiguous, which is not uncommon in Chinese law. What is clear is that these provisions allow China to respond to such measures in kind, leaving the authorities ample room to promote Chinese national security and interests as they deem fit. It remains to be seen how exactly these provisions will be applied in practice and what their implications may be for foreign parties active in and trading with China. As discussed in our November 2020 article, China previously enacted the Provisions on the Unreliable Entity List (UEL), a list-based sanctions framework targeting foreign entities and individuals engaged in activities deemed to endanger fundamental Chinese interests. Both the ECL and UEL empower the Chinese authorities to take proactive steps or countermeasures against foreign parties on the basis of national security and interests concerns. While the ECL focuses solely on transfer of controlled items, under the UEL the Chinese authorities can impose more restrictions or prohibitions, including with regard to a designated entity’s China-related trade, investments, visa, work and residence permits.

Recommendations

As follows from the above, the ECL leaves many questions unanswered when it comes to its scope, interpretation, applicability and enforcement. However, we do expect implementing rules and future amendments clarifying these uncertainties in the foreseeable future. Despite the current uncertainties companies can already take various measures to mitigate their exposure. First, companies are advised to raise awareness among management and relevant employees about the ECL's potentially broad applicability and the implications for their business. Companies that: engage in the export of controlled items from China, import and use of Chinese controlled items, or import and then re-export such items, may all be subject to different obligations under the Chinese export control regime. Second, companies are advised to assess their exposure by thoroughly reviewing their portfolio for controlled, or potentially controlled, Chinese origin items, both incorporated in their own items and not. A careful review of relevant contractual end-use/end-user provisions and monitoring of compliance with those provisions is also highly recommended. More generally, in view of the broad provisions promoting China's national interests and security, companies increasingly need to consider the impact of their business dealings on China's national interests and security, and China's potential response. Naturally, we will monitor the developments in Chinese export controls law and update our clients in due course.